Standing Committee F

[Mr. Joe Benton in the Chair]

Finance Bill

(Except clauses 4, 19, 23, 26 to 29, 87 to 92, 131 and 134 and schedules 1, 5 and 38) - Clause 126 - Aggregates levy: transitional relief for Northern Ireland

Amendment proposed [20 June]: No. 257, in page 100, line 21, to leave out the words 'in Northern Ireland'.—[Mr. Chope.] 
 Question again proposed, That the amendment be made.

Joe Benton: I remind the Committee that with this we are taking the following: Amendment No. 258, in page 100, line 24, leave out 'in Northern Ireland'.
 Clause stand part.

Christopher Chope: At our previous sitting, the Economic Secretary to the Treasury responded too succinctly. He rightly paid tribute to the Select Committee on Northern Ireland Affairs but omitted to mention that it had concluded that the clause would reduce the impact of the levy on the value-added sector only temporarily and would have no effect on the concerns of the Northern Ireland Executive, the wider industry and the community, and that the announcement of the provisions of the clause did not affect the tenor of the conclusions and recommendations in its earlier report.
 The Economic Secretary said at our previous sitting that clause 126 
''allows the sector time to adjust to the changed market conditions by, for example, increasing the use of recycled or other non-taxed alternative material in its processed products.''—[Official Report, Standing Committee F, 20 June 2002; c. 502–503.]
 Yet we understand from the British Geological Survey and work done by the Department for Transport, Local Government and the Regions that recycling even the maximum level of hard waste could substitute for between only 1 and 2 per cent. of the virgin aggregates needed. The provision will hardly produce the outstanding result suggested by the Economic Secretary that producers in Northern Ireland and the users of aggregates will be able to increase their use of recycled material to a much greater extent than was thought possible hitherto by any of the experts. 
 The Economic Secretary said that the Revenue forecast was expected to rise significantly next year and the following year because of the delay in implementation and the allowances to be made during the process of introduction. Why do the Revenue's forecasts continue to increase when the Government say that the purpose of the levy is to reduce demand? If demand were to fall, one would 
 expect the tax yield to fall rather than rise after the first year, but that is not what is shown in the Red Book. 
 What resources have been allocated to the problem of potential smuggling in Northern Ireland? The hon. Gentleman said that resources had been allocated and that there was a significant limit to the incentive to smuggle because of the weight, bulk and low value of aggregates. He did not explain the 40 per cent. drop in the output of traditional quarries in Fermanagh and South Tyrone. He did not answer the challenge that was posed about Northern Ireland quarrying sales being hit by smuggled aggregates. He did not mention the fact that producers of precast concrete in Northern Ireland are threatening to relocate to other parts of the European Union to take advantage of the competitiveness that will be created by the measure. A large coastal quarry in southern Ireland is being planned to target the United Kingdom market with its aggregates and tax-exempt concrete products. That is a sorry state of affairs and I hope that the Economic Secretary will provide a better response to our concerns than hitherto.

John Healey: The hon. Gentleman is right to remind the Committee of the role of the Northern Ireland Affairs Committee in helping the Government to produce these provisions. It has played an important role. As that Committee recognises, it is important to emphasise, even if that is not fully accepted at this point, that the proposals are for transitional provision in Northern Ireland. They do not give an exemption to Northern Ireland but will mean that companies in the industry in Northern Ireland will have five years in which to adjust to the introduction of the aggregates levy. We proposed that provision to help Northern Ireland and to preserve the integrity of a single fiscal regime across the United Kingdom. The five-year period, as I have pointed out, recognises the unique circumstances in Northern Ireland, which has a long land border with the Republic of Ireland.
 I am aware of the research that the hon. Gentleman cites on the potential for substitution with recycled materials, but I urge him to look less at academic research, which is inevitably predictive, based on best assumptions and estimates, and more at emerging practice on the UK mainland. That may be a sign of the way in which developments may go in Northern Ireland. For example, Alfred McAlpine is reportedly now investing £16 million in new transport infrastructure to move slate waste from its quarries in north Wales for use as road sub-base. The levy has made the slate waste commercially viable as a product for McAlpine, and it has plans to ship up to 10 million tonnes of slate waste per year from its north Wales quarries. According to reports, during the next 30 years, it intends to use up to 340 million tonnes of slate waste currently built up in its quarries. Until this point that has not been commercially viable but, as a result of the aggregates levy, it now is viable, and therefore a valuable source of an alternative to virgin aggregate. 
 On the resources that Customs has made available to deal with the potential for smuggling, I have nothing to add to my previous remarks. Hon. Members will appreciate that I shall not, in 
 Committee and in public, give chapter and verse on the deployment proposed by Customs to keep tabs on the impact of the levy and to ensure that we get the proper level of payment and avoid smuggling. Suffice it to say that Customs has built that into its operational plans for Northern Ireland and I am confident that the plans in place at this stage are sufficient. 
 On sales, it is true to say that sales from certain quarries in Northern Ireland have dropped during the past several months. However, it is too early to say whether that is the result of inevitable and predictable forestalling and stockpiling in advance of the introduction of the levy on 1 April or whether there is any long-term effect. I suggest that we need to wait and see for hard evidence of that, but I believe that the drop will prove to be the result of understandable forestalling practices in advance of the introduction of the levy. 
 Finally, on our anticipation of alterations to the revenue yields, the adjusted forecasts take account of the reduction in the extraction of aggregate as a result of the levy. That is precisely one of the purposes of the levy, built in from year one. The alteration to our anticipation of revenue take in the first year built in fresh assumptions about the forestalling practices that I mentioned a moment ago. However, we now anticipate our revenue yield on the levy once the phased introduction in Northern Ireland—which has also been built into the revised assumptions—is complete, to be very similar to what we had originally published and anticipated. The revised revenue forecast for the year 2005–06 is £395 million. For 2006–07, it remains at £420 million.

Christopher Chope: I am grateful for the Economic Secretary's further explanation of the matter, although I do not agree with him. He disclosed some revealing statistics about slate waste, and we shall have a chance to return to the issue when we debate another amendment but, for the time being, having had a debate about it, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Clause 126 ordered to stand part of the Bill.

Clause 127 - Aggregates levy: amendments to provisions exempting spoil etc

Christopher Chope: I beg to move amendment No. 255, in page 101, line 6, at end insert—
'(1) In section 17(1) of the Finance Act 2001 (c. 9) (aggregate that is exempt), at end insert ''except water''.'.

Joe Benton: With this it will be convenient to take amendment No. 256, in page 101, line 19, at end insert—
'(2A) In section 17(4)(c) of that Act insert— 
 ''or 
 (iii) the production of aggregate.''.'.

Christopher Chope: I hope that amendment No. 255 finds favour with all members of the Committee. It would
 make water exempt from the aggregates tax. The Government never said anything about wanting to tax water but, effectively, that is what is happening under the present arrangements. Customs makes an allowance for water added through washing or dust dampening but apparently is unable to make any reduction to take account of naturally occurring water—rainwater and groundwater. That imposes a disadvantage on quarries that extract aggregates from below the water table. Obviously, it is a big disadvantage for dredged aggregate as well.
 This is not some mere academic debate. The total amount of the levy that is payable by a wet quarry is about 7 per cent. more than for a dry quarry. I hope that the Economic Secretary can explain why the Government feel it appropriate to tax the water content of aggregates. Surely that was not what they intended initially. 
 A consequence of the present regime is that every one of the 488 businesses registered for the levy has been visited by Customs officers who have tried to draw up site-specific formulae to calculate the levy for each quarry, taking into account how much of the aggregate is wet and how much is dry, and the reason that it is wet rather than dry. That adds enormously to red tape, bureaucracy and compliance costs. We understand that the compliance costs are 30p per tonne for the average small quarry.

Chris Grayling: As my hon. Friend has considered the subject closely, would he clarify whether brine taken from above ground to extract salt is affected by the levy in the same way?

Christopher Chope: My hon. Friend might be better putting that question to the Economic Secretary, who has all the power of the Customs and Excise officialdom behind him. I am sure that my hon. Friend, having given notice of his interest in the matter, will be able to get a reply from him, and I am grateful for the support that my hon. Friend gives by implication to the amendments.
 Amendment No. 256 would ensure that the levy was not payable on waste by-products. Secondary aggregates are an unavoidable by-product of the extraction of industrial grade aggregates. For example, it can take up to six tonnes of throughput to achieve one tonne of industrial-grade limestone. Quarries must sell their secondary aggregates at the market price, often less than £1 per tonne, to maintain operating space within quarries and avoid unsightly spoil heaps. Obviously, there is a big contrast between the treatment of waste by-products coming from the quarrying of aggregate and the way in which slate waste is being treated, because disused slate quarries are being opened up in order to provide a new source of what is called virgin aggregate. The Economic Secretary has referred to the enormous investment made by McAlpine, which will probably damage the environment due to the transportation of slate waste over hundreds of miles of the English countryside in order to avoid paying the aggregates tax. 
 Surely, if the waste from slate is exempt from the levy because it is a waste by-product, the waste from 
 the production of aggregate and limestone should also be exempt so that such waste does not pile up in great spoil heaps throughout the country, which is likely under the present regime. There should be a proper incentive for the producers of that waste to dispose of it in the marketplace at a price that the market can bear. If the market price is less than £1 a tonne and has to compete with slate waste, the imposition of a levy of £1.60 per tonne plus VAT would result in the accumulation of large tips of waste aggregate. I hope that the amendment will find favour with the Government. Can anyone be in favour of fiscal incentives to establish spoil heaps in the countryside where they do not exist at the moment?

Chris Grayling: Good morning, Mr. Benton. I should like to follow on briefly from the comments made by my hon. Friend the Member for Christchurch (Mr. Chope). We must draw to the Economic Secretary's attention the fact that the debate is effectively about recycling. Although one cannot recycle the by-products of quarrying in quite the same way as the products of other processes, it would be extremely foolhardy to tax the recycling of aggregate waste out of existence and, as my hon. Friend says, create spoil heaps in the countryside.
 In addressing the issue, would the Economic Secretary set the debate in the context of recycling, and give a sense of the Government's view of good environmental practice in the aggregates industry and how they intend to incentivise and encourage that? Having raised the issue with my hon. Friend the Member for Christchurch rather than intervening on the Economic Secretary, I wonder whether he would address that question. There are several processes by which the product of an industrial process is extracted from water that is often taken from below ground, and there is a disposal element to that. One can also find waste products alongside the finished product—salt, for example, and the water that comes out. There is a danger that those products will be lumped together when assessed for the aggregates levy. I should be grateful if the Economic Secretary would address that point.

John Healey: I shall deal with amendments Nos. 255 and 256 and the several points raised by the hon. Gentlemen, and in so doing explain the basis of clause 127 more generally for the Committee.
 Amendment No. 255 is designed to tax aggregate by its dried weight, as the hon. Member for Christchurch described, even though that is not how it is normally supplied by the industry to its customers. Indeed, there are questions concerning how practicable and possible it would be to establish the moisture content for each consignment of aggregate in order to discount the naturally occurring water weight from the weight of the aggregate and therefore levy the tax in the way that the hon. Gentleman advocates. There is a practical question at stake. 
 However, more fundamentally, there is no case for the amendment because the current tax treatment of naturally occurring water, or any other substance that occurs naturally with the aggregate, reflects the practice in the industry. The industry sells by the tonne whether the aggregate is wet or dry. To move 
 away from that practice would increase complexity and undoubtedly result in increased compliance costs for the industry. To be clear, the tax is not on natural water, but on the weight of aggregate, of which naturally occurring water is an indivisible part. If I may say so to the hon. Member for Epsom and Ewell (Chris Grayling), water that is not rainwater or naturally occurring water in the aggregate but, perhaps, brine, would be treated in the same way and weighed as part of the total aggregate load on which the levy would be payable. 
 In summary, I urge the Committee to consider that amendment No. 255 does not recognise commercial practice, where suppliers sell a tonne of aggregate, wet or dry. It would introduce complexity into the process and inevitably add to compliance costs for the industry itself.

Christopher Chope: If that is correct, why is Customs and Excise making a special exemption for aggregate suppliers that choose to wash their aggregate as a natural part of marketing it, and why, where the aggregate is damped down artificially to stop dust developing, is the water used in that process subject to an exemption against the tax?

John Healey: If the hon. Gentleman has constituents who live near operations like this or has visited such operations, he will understand that the dampening down process is highly valuable for local residents because it reduces the dust that lorries introduce into the local environment. It is an additional process with a valuable environmental impact and it is right that we take it into account as a process not related to extraction. We have developed our proposals on that in consultation with the industry, which has broadly welcomed them.
 If I may say so to the hon. Member for Epsom and Ewell, the principal environmental impact of the levy lies in its very purpose, which is twofold. Its purpose is, first, to reduce reliance on the quarrying and extraction of virgin aggregates and, secondly, to do that principally by encouraging, through building in fiscal incentives, the industry and its customers to find recycled and alternative materials, which will allow us to scale down the quarrying of virgin aggregates. Alongside that is a determination to build some of the environmental costs of quarrying into the price and cost of quarrying, as I explained to the Committee during the last sitting. 
 That is the purpose and rationale of the levy and we are starting to see its impact. I quoted the response of McAlpine. A number of other companies are responding to the new regime in a similar way and that is, I think, helping us to feel confident that the levy will achieve its environmental objectives following its operation from 1 April this year.

Chris Grayling: Given that some quarrying will inevitably continue to take place—not all quarrying can be replaced by recycling—what measures is the Economic Secretary proposing, within the framework of the levy or elsewhere, to encourage good environmental stewardship by producers still extracting from the ground? How will this measure,
 which seems to tax the smart disposal of the inevitable by-product of their quarrying, help that process?

John Healey: I fear that the hon. Gentleman has taken the discussion well beyond the particular purposes and details of the clause into much more general environmental policy. Clearly, within the purposes of the provision and the clause, the levy is designed to have the impact that I stated. It is not designed to have a direct impact on the quarrying practices of suppliers in the industry and the techniques that they use.
 The hon. Member for Christchurch asked why limestone waste is not afforded the same treatment as other industrial mineral wastes such as china clay. The answer is threefold. Limestone is not included in the list of exempt industrial minerals in section 18(3) of the Finance Act 2001 because it is an aggregate. The material arising from limestone extraction is, in reality, low-grade primary aggregate rather than true waste and is often used and sold as such. Genuine waste will not be subject to the levy. As it will not be sold, it will not be commercially exploited. However, if limestone is used for a prescribed industrial or agricultural process rather than as an aggregate, it is relieved under section 30 of the 2001 Act. 
 Let me deal with amendment No. 256 and, in so doing, explain the purpose of and provisions in clause 127. The clause deals with two separate matters. First, it amends the aggregates levy legislation to make taxable the overburden—the top layer of material that must be removed before a mineral can be worked—from china clay and ball clay extraction. Secondly, the clause contains a provision to exempt waste from the processing of all industrial minerals that are exempt from the levy. Previously, coal, slate, china clay and ball clay were covered. The clause brings into the exemption provision minerals such as fluorspar and other small-quantity minerals that are extracted. The changes will encourage the use of aggregates unavoidably produced in the process of extracting industrial minerals and help to ensure consistent treatment of mineral waste under the legislation. 
 Amendment No. 256 would exempt any waste, spoil or by-products arising from the production of aggregate and, therefore, subvert the purpose of the clause. The Government conducted the development of their plans for the aggregate levy and their preparations for its implementation on 1 April in a very open and consultative spirit, with regular meetings with the industry, trade associations and other interest groups. In keeping with that, there have also been detailed discussions with the aggregates industry on a suitable definition of waste aggregates or aggregate by-products. To date, the industry has been unable to provide us with a suitable alternative, comprehensive definition. 
 Quite simply, the reason is that it is difficult to produce a clear and consistent dividing line or borderline between what is and what is not waste. Aggregate quarries produce rock, sand or gravel. Therefore, any rock, sand or gravel that can be used as aggregate and sold as such is not waste but an 
 aggregate. It is only correct that the purchaser pay the environmental costs associated with its extraction; therefore, it is covered by the provisions of the levy. 
 Sometimes, quarry owners may describe some of the aggregates that they sell as by-products because they regard them as incidental to the production of their main or higher-value products, on which they make larger profits. However, exactly the same aggregates may be a main product from another quarry. In other words, one man's by-product or waste may be another man's main product. It would be unfair and distorting to base liability for the levy on whether the quarry owner regards such material as a by-product. Genuine waste materials will not be commercially exploited and, therefore, will not be subject to the levy. 
 Moreover, as we announced in the pre-Budget report in 2001, the Government continue to examine with the industry whether it is possible to deliver additional environmental benefits through the aggregates levy by encouraging the more general and positive use of true waste aggregates that would not otherwise be commercially exploited. On that basis, I hope that the hon. Member for Christchurch will feel moved to withdraw the amendment. If he is not prepared to do so, I ask the Committee to reject it.

Christopher Chope: Dealing with amendment No. 255 first, the Economic Secretary explained how naturally occurring water in aggregate is part of the system, and how aggregate is weighed and sold by the tonne with as much water as there happens to be in it. He went on to explain the fiendishly complicated calculation that Customs and Excise had brought in to work out how much water has been put into aggregate in order to reduce the incidence of dust. He said that there was an environmental benefit in the reduction of dust, which we would endorse absolutely. What he did not address were cases when aggregate is washed and sold wet, having been washed to make it more saleable. It may be sea-dredged aggregate that has been washed. Why should there be a special allowance for aggregate in that washed state when there is no allowance for aggregate from beneath the water table? I am not convinced by the Economic Secretary's explanation on that.
 On amendment No. 256, the hon. Gentleman says that the aggregates industry has been consulted. Perhaps I could tell the Committee of something that I was informed about this morning by the British Aggregates Association. It says that there was a court case in front of the European Commission when the application for state aid approval in relation to Northern Ireland was considered by the Commission. The Commission's judgment reached the conclusion that it would be reasonable to allow state aid approval for Northern Ireland, but it also—more interestingly—reached the conclusion that the whole United Kingdom regime was state aid because of the differential impact that it has on different parts of the industry. As one can see from the examples that we have talked about, that is particularly true of the slate industry. 
 The Government have introduced a fiscal regime that will give an incentive for virgin slate to be quarried and to be used in place of aggregate waste. It will be transported hundreds of miles across the country to enable that to happen. How can that be sensible? It is surely a distortion of the market. How can the Government assert that it is a good thing to have a slate quarry operating, but not a limestone quarry, or that it is a bad thing to quarry virgin limestone but acceptable to quarry virgin slate? That does not make sense. 
 The European Commission produced its findings on the matter in April. The Government were given 14 days in which they were allowed to indicate whether they felt that the draft judgment should be made publicly available. They did not say anything, and it is only in the previous 48 hours or so that Customs and Excise has agreed with the British Aggregates Association that the draft judgment should be published. The draft judgment shows that the European Commission's view is that the whole regime and structure involves state aid. It has given approval to that, but the Government have hitherto argued that the only element of state aid was in so far as it affected Northern Ireland. Needless to say, that will be the subject of further litigation in the courts, but I think that it drives a coach and horses through the Economic Secretary's suggestion that he is actively consulting the aggregates industry. The industry urged Customs and Excise to give permission to publish the judgment at the end of April but it is only now, towards the end of this Committee, that that permission has been granted. It is significant and exemplifies the responsibility of the British Aggregates Association that it did nothing that it was not authorised to do and sought approval from Customs and Excise first. 
 Opposition Members feel that we should not countenance legislation that will encourage the mining and crushing of virgin slate while at the same time encouraging the dumping and accumulation of waste aggregate. That encapsulates our arguments in support of amendment No. 256.

John Healey: Before the Committee perhaps divides on the amendment, I would not want it to be under any misapprehension on a matter as important as the proceedings and judgments of the European Commission, which Conservative Members follow closely. The High Court, in the judicial review proceedings brought by the British Aggregates Association to which the hon. Member for Christchurch referred, found that the exemption was not a state aid. The Commission ruled that the levy does not contain any state aid, contrary to the information supplied to the Committee by the hon. Gentleman, apart from the phasing in of the levy in Northern Ireland, which is accepted by the Commission as a permitted state aid under environmental guidelines of which the European Commission is the custodian. I hope that that clarification has set my hon. Friends' minds at rest.
 Question put, That the amendment be made:—
The Committee divided: Ayes 10, Noes 18.

Question accordingly negatived. 
 Clause 127 ordered to stand part of the Bill. 
 Clause 128 ordered to stand part of the Bill.

Clause 129 - Aggregates levy: miscellaneous amendments

Question proposed, That the clause stand part of the Bill.

Joe Benton: With this it will be convenient to take the following: New clause 26—No exemption for commercial exploitation within the United Kingdom—
'.—In section 19(5) of the Finance Act 2001 (c. 9) at end insert ''and if the purposes for which the aggregate is commercially exploited are within the United Kingdom.''.'.
 New clause 27—Aggregates levy: adjustment of contracts— 
'.—(1) The Finance Act 2001 (c. 9) is amended as follows. 
 (2) In section 43(1)(a), after ''quantity of aggregate'' insert ''or quantity of product containing aggregate.'' 
 (3) In section 43(1)(b), at end insert ''or quantity of product containing aggregate,''. 
 (4) In section 43(2)(a) insert ''or 
 (iii) indices for the price of aggregates''.'.
 New clause 28—Reduced rate of aggregates levy— 
'.—In subsection 4 of section 16 of the Finance Act 2001, for ''£1.60'' substitute ''50p''.'.

Christopher Chope: These new clauses, particularly new clause 28, enable us to have a debate on the nonsense of the aggregates levy. New clause 28 is drafted to reduce the rate from £1.60 per tonne to 50p per tonne, but that is a form of words to enable the debate to take place. New clause 26 would exempt from the tax, aggregate used in the production of concrete products for export—a straightforward competitiveness issue. New clause 27 would extend the protection in section 43 of the Finance Act 2001 so that price increases due to the levy could be passed on in long-term contracts to supply aggregate products. The increase shown by price indices due to the levy would not then cause rents linked to those indices to rise.
 The competitiveness problems arising from the legislation are now coming into stark relief. Nowhere is that more true than in Northern Ireland, as we have said, but it is also true in Scotland. As I understand it, a company there manufactures products, for sale outside the United Kingdom, involving the use of a 
 lot of aggregate as an aggregate coating on those products. As a result of the incidence of this tax on its products, it is seriously considering whether to relocate its business outside the United Kingdom. The tax is making its product uncompetitive in the marketplace. If that is what the Government wanted to achieve, they are well on the way to doing so, unless they accept new clause 26, which would allow some relief. 
 While we are talking about Scotland, we know from the Quarry Products Association that the total aggregates tax regime will cost Scotland about £12 million. In contrast, Greater London will benefit by some £43 million each year. Is that something that the Government intended? Did they intend to subsidise Mayor Livingstone's people by £43 million and take away £12 million from the Scots as a result of the operation of the aggregates tax? I suspect that they did not, but that has been the consequence of this ludicrous taxation regime. Now, on top of that, they will find that, because of the effects on companies in Scotland manufacturing products involving aggregate for export overseas, those companies will be separately penalised and the Scottish economy damaged. What a deplorable state of affairs. 
 An argument put forward for the aggregates levy was that there would be a sustainability fund to help communities—as it was originally expressed—adversely affected by the impact of quarrying. One's immediately thought is that it is hard luck on people who live near the slate quarries that are now reopening as a result of what the Government's legislation is doing in the marketplace; they will not be given any help from the fund. The fund was originally intended to help communities close to quarries, but we are now told that that will not happen because much of the money will be frittered away on bureaucracy and so on. It will not be used to help local people, who normally feel imposed on when quarrying or sand and gravel extraction takes place in their communities. I know that from my constituency, where there are sand and gravel workings. One of the consequences of having a constituency on the very edge of both Hampshire and Dorset is that, because the Hampshire minerals plan has decided that it would be best to extract minerals right on the edge of the county boundary, and the Dorset minerals plan does exactly the same thing, my constituents suffer. They were led to believe that they would get some relief under the regime from the special fund that would be provided from the tax proceeds. We now find that that will not happen. That is one justification for significantly reducing the rate of the tax. 
 Another justification for reducing the rate of the tax—indeed, eliminating it—is to do away with the enormous bureaucracy that has built up around it. The tax was ill advised in the first place. The Department for Transport, Local Government and the Regions expressed serious doubts about it. In a previous debate, the Economic Secretary dismissed the studies that the Department carried out at taxpayers' expense as backward rather than forward looking. If the 
 studies were worthless, why were they commissioned in the first place? The short answer is that they came up with the wrong answer and, instead of accepting the advice that they should have accepted, the Government decided to ignore them and to try to justify the tax on the basis of fresh argument. 
 I hope that the Committee will accept the new clauses and thereby improve the present position by reducing the adverse impact of the tax. However, as we have said before, the best answer would be to abolish the whole rigmarole.

Chris Grayling: I want to make a few remarks following on from my hon. Friend's comments. He raised some very important points about the measure. Most fundamental is the effect on many parts of our quarrying industry. Last week in the Chamber I had an exchange with the Chancellor of the Exchequer about a different industry but one on which the effects are likely to be similar. I pressed him again on the effect of the changes to North sea oil taxation. He started by defending the tax and its structure, but ended by asking how I proposed to raise the £500 million that the tax would raise.
 The fundamental point is that, behind all of the window dressing, the Government are raising taxes from industry. They are taking £500 million from the North sea oil industry. In the case of the aggregates levy, they are taking millions of pounds from companies that are often key employers in remote parts of the country and thus fundamental to the survival of local communities. The Government cannot remove millions of pounds from an industrial sector without affecting its profitability and competitiveness, as well as its ability to play an active role in local communities and to follow good environmental practice and stewardship. 
 The Economic Secretary's response in the exchange a moment ago was lamentably weak. He had nothing to say about the Government's role in using the levy—if it must remain—to encourage good stewardship by companies that will continue, inevitably, to extract aggregates from the ground. The aggregates industry will not disappear and be replaced by a recycling service. If the Government wish to levy taxation on the industry, it is their responsibility to use the structure of the levy to encourage good environmental stewardship and performance. However, that is not happening. If the Government take millions of pounds out of remote communities in Scotland and recycle them in projects in other parts of the country, they provide no incentive whatever to companies to find the funds to put right some of the inevitable impact of aggregate extraction. 
 I would point the Economic Secretary in the direction of visible projects around the country. Gravel pits have been left in areas where sand and gravel have been extracted regularly for years, and the industry has turned those pits into some of our finest nature reserves. In many parts of the country—particularly the Cheshire countryside, which I know well—there are any number of high-quality reserves providing a valuable habitat for wild birds and other wildlife, which have resulted from investment put in by the aggregates industry after the extraction of minerals from a particular site. 
 Inevitably, if taxation is levied from that industry, which is not structured in a way that encourages good environmental practice, and all that is done is recycle through a giant bureaucracy into projects that may have no relation whatever to the original source of the mineral extraction, the development of such projects in future will not be encouraged—it will probably be hampered. 
 The Government need to think again about the impact of the measure. They seem to believe that they can extract money from different industries without any impact on those industries' finances, the communities that they serve or the responsible works that many companies involved in the industries perform in their local communities for the good of people and the environment. The Government need to think again on the subject. My hon. Friend the Member for Christchurch is doing a valuable job for many communities in this country by highlighting the issue. I hope that the Government will think about what has been said in the Committee this morning.

Michael Jack: I want to make one or two remarks following the excellent and cogent lines of argument of my hon. Friends the Members for Christchurch and for Epsom and Ewell.
 No one would disagree with the need in many areas to be far more aware of the environmental impact that human activity has. In the context of aggregates and minimising the impact on the environment, I think that people would generally welcome the measure's objectives, but the Government have perhaps a schizophrenic approach to some of their environmental legislation. The objectives of the aggregates levy could have been achieved by a different route. 
 Had the Government settled down with the industry to negotiate some binding agreements about minimising the production of wastes and recycling existing materials, that would have been entirely supportable and laudable, and would, no doubt, have achieved the objective. I pray in aid of that argument the approach that the Government have taken with industries covered by the Intergovernmental Panel on Climate Change arrangements in the context of the climate change levy. Those industries were the subject of negotiated agreements on the reduction of energy usage. 
 If the Government can deploy in pursuit of reduced energy usage agreements that effectively bind people to achieve certain targets, surely in the context of aggregates they could do the same. It is right that people should be suspicious of the true motives that underpin that form of taxation, because the Government have chosen not to go down that route, but to use the levy as a source or revenue generation. Having been part of a Government who introduced new taxes, I know that it is never easy to do. Sometimes, it is hard to explain why one is doing something to raise revenue, but in this case the matter is highly focused. It deals with minimising the effect of the extraction of aggregate materials on the natural environment, and encourages the recycling of already used materials, both of which are to be entirely welcomed. However, the way in which that has been 
 done shows that, in truth, it is really about raising money, rather than achieving an environmental objective.

John Healey: I shall deal first with the points put to me in debate, and then with the three new clauses in reverse order.
 I regret that the hon. Member for Christchurch has belittled the sustainability fund, which will be worth £35 million in the first year. It is a new fund that has been designed to promote alternative uses of virgin aggregate, efforts to reduce the impact on local communities that suffer from the blight of nearby quarrying, and the environmentally friendly extraction techniques that the hon. Member for Epsom and Ewell returned to again in the debate.

Michael Jack: Will the Economic Secretary give way?

John Healey: If I may finish this point, I will then certainly give way.
 The sustainability fund will play a part in the encouragement of more environmentally friendly extraction techniques. If the hon. Member for Epsom and Ewell has suggestions for how, in addition to that, we might reinforce the operation of the levy to achieve that effect, I am very willing to look at them. I shall ensure that his proposal on encouraging members of the industry to be better stewards of the resources that they manage and exploit is put to the industry for discussion in our regular discussions with it.

Michael Jack: In his remarks a moment ago, the Economic Secretary mentioned a number of arguments in favour of the aggregates levy. I wonder what plans the Government have to produce, on each anniversary of the introduction of the levy, an assessment of its impact and a commentary on how it is working.

John Healey: As an experienced Treasury Minister, the right hon. Gentleman will know that the Government keep the operation and impact of all taxation legislation under continuous review. The annual Finance Bill often becomes the point at which such matters can be examined and debated. I trust that that will be the case in the future.

Michael Jack: I wonder if the Economic Secretary will give way.

John Healey: Again?

Michael Jack: Again.

John Healey: By all means.

Michael Jack: I am grateful to the Economic Secretary for his courtesy in giving way.
 I accept entirely the Economic Secretary's first line of argument in response to my question, but he has put on record a series of tenets that he believes justify his position. So that Opposition Members and people outside might judge the robustness of his argument with even greater clarity, will the Treasury be kind enough to share with us the results of that continuous review exercise on the next anniversary of the introduction of the tax?

John Healey: The right hon. Gentleman is very skilled at testing the robustness of my arguments and those of my hon. Friends, and I am sure that he will do so in future Finance Bills. On his second point, whether we should be considering for the aggregates levy something akin to the model of negotiated agreements that we have implemented for the climate change levy, if there is scope for such measures to help to achieve the purposes and objectives of this levy, we are indeed prepared to discuss them. That might be another item on the agenda for the next round of discussions that we hold regularly with the industry. I shall ensure that the right hon. Gentleman receives due credit for raising the point with me in Committee.

Chris Grayling: Does the Economic Secretary recognise that the difference between us, on the issues to which he referred a moment ago, is that the Government appear to believe that the sensible way to proceed is to levy a tax on the industry, put it into a fund and then allow people to bid for the fund for special projects? The approach that I would advocate is discussion with the industry, identification of possible ways of improving environmental stewardship, perhaps the provision of tax incentives to pursue those, then leaving the businesses with the job of carrying them out. That would be better than creating this convoluted, bureaucratic process where the money goes out, goes around through bureaucracy and then comes back in again.

John Healey: I understand the hon. Gentleman's point, but the difference between us is that he does not want to see the aggregates levy in place and in operation. We believe that there is a strong case for it, with strong environmental objectives. That is why we have legislated for it.
 On the point made by the hon. Member for Christchurch about Scotland, the argument that large areas of the UK, which produce the bulk of aggregate, will suffer disproportionately from the introduction of the levy because the tax bill outweighs the national insurance contributions cut from which they will benefit, is simply not accurate. The levy is an indirect tax and, as such, the cost will ultimately be borne by the consumer. Given that the cost of the levy will largely be passed on in price increases to the consumers of aggregates, the tax burden is much more evenly spread across the country than his argument suggests. London and the south-east, where companies will benefit from the 0.1 per cent. cut in national insurance contributions, are the very areas that are the most intensive users of aggregates for construction purposes. 
 I turn to the three new clauses. Let me be clear at the outset that I do not accept any of them, but I shall deal with them in reverse order. The hon. Gentleman was good enough to tell the Committee that the purpose of new clause 28 was to have a debate on the principle of the levy. Let me take the Committee back to the starting point. The levy is based on the work that we did—independent research and analysis—which concluded that significant environmental costs are associated with the extraction of aggregates. Before the levy, those costs were not covered by regulations and included noise, dust, visual intrusion, 
 loss of amenity and damage to biodiversity. The former Department of the Environment, Transport and the Regions, which was largely responsible for that research, concluded conservatively that the environmental damage attributable to extraction of aggregates could be costed at around £1.80 per tonne. The Treasury, as is its wont, took a prudent and cautious view and set the rate at £1.60.

Christopher Chope: It is £1.60 per tonne plus VAT, is it not?

John Healey: It is £1.60 per tonne. That is the aggregates levy. The cost that the environmental research suggested for the environmental damage is more than that.
 The levy is already bringing environmental benefits—that was the principal purpose of introducing the provision—by making the price of aggregates better reflect their true environmental costs and encouraging the use of alternative materials, thereby reducing the amount of virgin aggregate extraction.

John Bercow: I am extremely grateful to the Economic Secretary for giving way. Will he answer a straightforward question: is or is not the levy subject to VAT? Yes or no?

John Healey: Very simply, as with a range of other services and goods, the levy is subject to VAT. It is set at £1.60 per tonne. The cost of the environmental impact is greater than that.
 On the principle or purpose of the tax, which is where the hon. Member for Christchurch wanted to take the Committee, reports from Alfred McAlpine cited the strong impetus that it is providing for sourcing alternatives to virgin aggregates. Encore Environmental Aggregates, Northern Tyre Disposals, Alcan Smelting and Power UK have all reported recently that they are making moves in a similar direction. A tax rate for the aggregates levy of 50p per tonne plus VAT, as proposed in new clause 28, would not reflect the true environmental cost of aggregates extraction and would not provide sufficient incentive to encourage the efficient use of virgin aggregates and the use of recycled aggregates or other alternatives to virgin aggregates. Not only would the aggregates industry be affected, but the hon. Gentleman's new clause would entail a significant loss to the Exchequer of more than £200 million as the 0.1 per cent. reduction in employer's national insurance contributions that accompanied the introduction of the levy is already in place.

Chris Grayling: I should be grateful if the Economic Secretary would answer two questions. First, are imported aggregates subject to the levy? Secondly, what change has there been in the trade balance in aggregate materials since the introduction of the levy?

John Healey: The answer to the hon. Gentleman's first question is yes. The answer to his second question is that the levy has been in place only since 1 April this year and it is too early to give a definitive answer.
 Turning to new clause 27, the first amendment covered by it would extend the adjustment of contracts provision to contracts for the supply of processed 
 products. To extend any of the provisions of the levy to processed products would be far from straightforward. When aggregates have been used to manufacture processed products they have already passed the tax point and are no longer aggregates for the purposes of the levy. The commercial arrangements for onward supply of aggregates beyond that are intentionally outside the scope of Customs legislation, and it is certainly not something that could be done simply by bolting a new clause on to existing legislation, as Conservative Members seem to think. 
 The second change that the new clause would make concerns the provisions for adjusting rent or royalty payments as a result of the levy. I confirm for the hon. Member for Christchurch that the Government have already examined the area carefully. We have benefited considerably from our extensive consultation with the industry and other interests. The results of the consultation have produced a suitable measure that renders the amendment unnecessary and, I hope, settles the hon. Gentleman's concerns. 
 Some rent or royalty payments are adjusted according to indices of aggregates prices published by the Office for National Statistics. The Quarry Products Association proposed earlier this year to make the necessary arrangements with the ONS to produce both levy-inclusive and levy-exclusive indices, so that the levy-exclusive index could be used to adjust rents and to ease industry concerns about the matter. That solution will not require a change to the primary legislation, as section 43 is already wide enough to allow for such adjustments. Therefore, the suggested change to the law covered by the second part of new clause 27 is not necessary. 
 Finally, let me turn to new clause 26 and the concerns of the hon. Members for Christchurch and for Epsom and Ewell about competitiveness. There is no case for the new clause. The aggregates levy does not significantly affect international competitiveness. Frankly, the scare stories about the potential flight of firms from the UK are just that, because there is limited international trade in processed products. Exports represent only about 3 per cent. of total precast concrete industry sales, and that low level of exports is mainly in high-value products. The prices for such products may range up to £120 or £130 per tonne and are not significantly affected by the levy. Where there is a risk of international competition in processed products—in particular, in Northern Ireland—we have already taken steps to help the industry adjust to the aggregates levy. Apart from that special case, the aggregates levy should not have an impact on the competitiveness of exports of processed products, but we shall carefully monitor that. 
 Finally, the measure is unlikely to receive the necessary European Union state aid approval, as it is not consistent with the declared nature and logic of the aggregates levy. On that basis, I urge my hon. Friends to reject all three new clauses proposed by the Opposition.

Christopher Chope: The Economic Secretary has made a valiant attempt to defend the indefensible. Let us just remind the Committee of the effect of the levy. We are
 coming up to the Commonwealth games. Lawn sand that is put on the green grass areas of the sports stadium is exempt from the levy, but sand put in the long-jump pit is subject to it. Is not that absurd? The absurdity is repeated a thousandfold across other parts of the economy, and all the time it is being policed by expensive Customs and Excise officials.
 On exports, surely it would be reasonable to allow the new clause to be part of the legislation, if the cost is so low. The information that I have—the Economic Secretary pooh-poohs it, but I have not divulged it for commercial and confidential reasons—is that the levy is having an effect on people who are seeking to export products. Therefore, I hope that the Committee will support new clause 26 when we put it to a vote.

Chris Grayling: Does my hon. Friend agree that time and again, in this Committee and in similar proceedings, we see a total lack of understanding on the Government Benches of the impact of even relatively small changes on the profitability of a business. They seem to believe that an additional 1 or 2 per cent. makes no difference, but cumulatively, in industries with tight margins, it can make a huge difference to the viability of businesses.

Christopher Chope: My hon. Friend is absolutely right. One only has to look at today's financial news to realise that all those little bits and pieces are catching up with the Government because they are damaging our economy. Contrary to what the Prime Minister said at Question Time last week, the stock market is now lower than it was when the Government came to office, which is in no small measure because of their taxation policies.
 The Economic Secretary has said that there is an environmental justification for the tax. That has certainly been the argument advanced. It is a pity that the Government did not listen to the arguments expressed by bodies such as Friends of the Earth Northern Ireland, which suggested that there were alternative ways of addressing in the planning system the issue of demand and the environmental impact of aggregate supply, and encouraging the reuse of construction wastes. 
 I put down this challenge to the Government. The levy purportedly deals with some environmental costs: the noise, the dust and the damage that comes from hard rock quarrying, and sand and gravel pits. However, what happens when a slate quarry is reopened? Is there no environmental impact? What is the environmental cost of reopening that quarry and transporting the slate and slate waste across hundreds of miles? The Government have been very partial in the legislation, and I return to the state aid issue. Perhaps the Economic Secretary has not yet seen the press release issued by the British Aggregates Association this morning, but it says: 
''The BAA applied to the high court for a judicial review of the aggregates levy. At that review the Government successfully argued that the levy as a whole was not state aid.
The Government had previously applied to the European Commission, under State Aid rules, for permission to grant a temporary partial exemption in Northern Ireland. The Commission approved this special treatment''—
 I emphasise this— 
''but, in an unexpected move, then went on to approve the levy as a whole, even though the Government claims that it had not asked it to do so.
However, the Commission decision of the 24th April, passed privately to the UK Government just three days after judgment was given in the High Court, accepts that the levy is indeed state aid—and approves it on that basis.''
 Sadly, that is why the issue will run and run in the courts, if the Government will not accept the arguments put forward against this ludicrous tax. 
 Question put and agreed to. 
 Clause 129 ordered to stand part of the Bill.

Christopher Chope: On a point of order, Mr. Benton. I was wondering about new clause 26. Will we be able to deal with that?

Joe Benton: At the moment we are discussing the new clauses together with clause stand part. There will be an opportunity to move new clause 26 formally later in the agenda.
 Schedule 37 agreed to. 
 Clause 130 ordered to stand part of the Bill.

Clause 132 - Mandatory e-filing

John Bercow: I beg to move amendment No. 227, in page 104, line 7, leave out 'requiring' and insert 'permitting'.

Joe Benton: With this it will be convenient to take the following amendments: No. 228, in page 104, line 38, leave out 'or requirement'.
 No. 229, in page 104, line 41, leave out 'or requirement'. 
 No. 254, in page 105, line 9, leave out 'required' and insert 'permitted'. 
 No. 231, in page 105, line 20, leave out subsection (7).

John Bercow: Good morning, Mr. Benton, and welcome to the Chair. We are dealing with a very important set of amendments, and it is essential to explain the background to them.
 Clause 132, as Members and others will doubtless be aware, provides for mandatory filing of payroll returns and information over the internet by 2010. The Conservative party supports measures to encourage electronic communication, but we strongly believe that this provision is totally unreasonable. In view of the Government's lack of success with electronic systems, including, I should emphasise, the Passport Office fiasco and the recent withdrawal of the electronic filing of self-assessment tax returns due to a security failure, this measure is manifestly not a reasonable or even responsible approach. 
 The essence of the amendments with which we are now dealing—we shall turn to others in due course—is to propose a permissive rather than a prescriptive approach. In other words, by contrast with the Government, we are saying that if people wish to file 
 their tax returns electronically, now or by 2010, they should be permitted to do so. We are the party of choice. On the other hand, people should be under no obligation to do so if they do not wish to. That is where the Government's prescriptive approach is widely resented. 
 We hope, even now, at the 59th minute of the 11th hour, that the Government will withdraw. I can say, in a constructive spirit, to whichever Minister responds to the debate, that we would not in any way seek to exacerbate the Government's embarrassment were they now to say, ''Sorry, we accept that we got it wrong. Some powerful representations have been made to us and we have decided to reconsider. We have abandoned prescription in favour of a permissive approach. Will you Conservatives now bank the concession and say no more about it?'' The answer to that would be yes. 
 I have always taken the view, the more so over the years, that there is no shame in making a mistake, only in failing to acknowledge the possibility of having done so. That is the offer that I make. I ask the Ministers just to think about it. They can do this very painlessly. Hon. Members on this side will not bang on and bore the Government rigid, for months to come, about the fact of their failure and embarrassment. I am dangling a pretty juicy carrot, and Government Members should not dismiss it lightly. Think of the endurance test to which Members will otherwise have to be subject. 
 The issue is very serious, and I shall deal first with the views of respected tax practitioners. I shall come on to other aspects of the debate in due course, especially under amendment No. 230, but at this stage I pray in aid the tax faculty of the Institute of Chartered Accountants in England and Wales. Its view, I am sure the Minister would agree, is important to our debate, although not the only valid opinion. The tax faculty says: 
''The Government and the Revenue should be concentrating their efforts on ensuring that its''—
 I presume, the Revenue's— 
''e-filing systems are easy to use, robust and reliable and only then encouraging taxpayers to use the service.''
 That seems a reasonable position. It goes on to say: 
''We object to this clause in the strongest possible terms and believe that is should be withdrawn.''
 It continues: 
''It needs to be appreciated that the obligation to apply PAYE is not limited to businesses. Many individuals engage nannies, gardeners and other helpers and have an obligation to deduct PAYE from the salaries of such people.''
 The clause has its origins in the report prepared by Patrick Carter on payroll services, and I do not doubt that Ministers will invoke that in support. However, it is important to recognise that the tax faculty of the Institute of Chartered Accountants in England and Wales made a representation to that review. In it, it emphasised that it disagreed with some of the conclusions reached in the report, particularly that there should be compulsory e-filing of payroll returns. It said: 
''Whilst the future of efficient payroll management, both for employers and for the Inland Revenue lies in an electronic solution, we are concerned at the unrealistic time scales which have been proposed and the element of compulsion suggested . . . Problems within the current electronic solutions need to be resolved before consideration of whether electronic filing should be made compulsory.''
 It went on significantly and cogently to add: 
''Such a decision should only be reached after further debate in the light of experience of the current electronic filing methods.
We are aware that other representative bodies submitted similar representations and we are deeply disappointed to find that, not only has such a provision been included in the Finance Bill, but the proposed scope of the provision has now been extended to include compulsory e-filing generally.''
 The Institute of Chartered Accountants in England and Wales and others question whether the unamended clause is compatible with the European convention on human rights, as the Government somewhat unconvincingly claim. That is the judgment of the ICAEW. 
 The Chartered Institute of Taxation is presumably of some relevance to our deliberations. It stated: 
''We feel strongly that the attempt to make an e-filing regime compulsory is the wrong approach. Whilst supporting the moves towards e-filing we believe the incentives should be by way of carrot, not stick. There are considerable administrative efficiencies to be gained from electronic communications but many of these benefits will accrue to the Revenue. The costs savings need to be shared. It is not fair to impose further costs on the taxpayer and businesses.
We find these particular clauses''—
 clause 132 and associated clause 133— 
''onerous and un-deregulatory and are most concerned that general empowering clauses, with so little substance, have been placed in a Finance Bill. If compulsory e-filing in specified circumstances is deemed necessary (for employers, following Carter for instance) then proposals of substance should be brought before Parliament for proper debate. Statutory Instruments should only be used to fill in or change minor details. They should not be used to contain the whole legislation.''
 In other words, the CIOT is saying that we should know for what we are speaking or voting for or against, if our deliberations are to be accessible and intelligible to the outside world. The Government should not present us with what is, effectively, a skeleton in the Bill, which we are invited to support, on which the flesh will be added only at a later stage by people acting on behalf of the Government. Parliament must be given an opportunity to express a view about the substantial flesh placed on the skeleton. 
 There may be a simpler way of putting it—I am sure that several of my right hon. and hon. Friends want to contribute to the debate—but that summarises the essence of the undesirability of the Government's approach. They say very little in terms of specifics. They give themselves Henry VIII powers and ask us to trust them. They say that the detail will come later, that Parliament will not have a chance to comment on it, but that they are people of good will who will behave themselves. They say that everyone will be happy—of course, it will be too late to register that one is not happy—and, never mind, they are good chaps and chapesses, lie back and think of England; all will be all right on the night. 
 As all hon. Members know, I am an extremely charitable fellow. I try to see the best in my parliamentary colleagues of all parties. Therefore, I say gently to the Paymaster General—I do not want to wound her in any way—that I have not been altogether encouraged by her record. I am not willing to be mollified by the soothing bromides for which she is renowned. That is not good enough for me. I am, frankly, more persuaded by the professional concerns of the Institute of Chartered Accountants in England and Wales and the Chartered Institute of Taxation. We want a permissive rather than a prescriptive regime. 
 That is a compelling argument in its own right, but there is another relevant consideration, especially when we are being invited to take something on trust. I have referred bluntly and perhaps, from the vantage point of the Paymaster General, woundingly to my inability on the strength of the record entirely to trust her, on the basis not of abstract and pejorative comments, but of precedent. I am sorry to say that in addition to the skeleton in the Bill, there is another lurking in the ministerial cupboard on this subject and it is my duty to bring it to the Committee's attention. It is in the form of an exchange between the Paymaster General and her right hon. Friend the Member for Leicester, West (Ms Hewitt), the Secretary of State for Trade and Industry. 
 On 9 August 2000, the Secretary of State for Trade and Industry wrote on behalf of her constituent, Mr. Jim Fear of 139 Winchester Avenue, Leicester, to the Paymaster General about the Income Tax (Electronic Communications) Regulations 2000. The Secretary of State for Trade and Industry emphasised Mr. Fear's concern—this is important and not a laughing matter—about being forced to use the internet. That troubled him and offended against his principles. The Secretary of State for Trade and Industry, quite properly in her capacity as a constituency Member of Parliament, wrote to the Paymaster General, who sent a two-page reply. Her prose was of the finest and she would probably like me to read out all of it, but I shall resist that temptation. She wrote to her right hon. Friend on headed Treasury notepaper on 21 September 2000. Paragraph 2 of her letter, which started, ''Dear Patricia'', stated: 
''You said that Mr. Fear was concerned about being forced to use the Internet and felt that Regulation 4 could be used in this way. I confirm that it is not Government policy to force people to use the Internet, but we are committed to offering them the choice of electronic services. Those who prefer to use paper to communicate with the tax authorities will continue to be able to do so.''
 That seems clear, but the Government now propose to have mandatory e-filing by 2010. They believe that they can somehow bridge the gap between the letter of September 2000 and the contents of the Bill, and minimise, if not remove, the Paymaster General's embarrassment by invoking the notion that an intermediary can undertake the e-communication and e-filing. However, with all respect to the Paymaster General, although she may genuinely believe that that is a satisfactory compromise, it can be satisfactory only if the people at whom it is principally aimed judge it to be satisfactory. I am sorry to say that people who, for whatever reason—
 some are motivated by conscientious and religious objection—object to being forced to use the internet to file their tax returns, do not consider the concession being offered by the Government as in any way satisfactory to meet their concerns. 
 In a letter dated 20 June to Mr. Ron Davis of 14 Church Lane, Whitchurch, Bristol, the Paymaster General stated: 
''I am able to confirm that it remains Government policy not to force individuals to use the internet personally''.
 My hon. Friends will note the insertion of the word ''personally''. The letter continues 
''and reassure you that nothing in clause 132 nor the regulations that will follow will create such a requirement.''
 The Paymaster General goes on to talk about the use of intermediaries. 
 People who are unhappy about the clause are not persuaded by the Paymaster General's letter, and it is important to emphasise why they are not. They believe that it should be a matter of choice as to whether they, or those acting on their behalf, use the internet for the purpose of filing tax returns. They are not satisfied that the Government have any such arrangement in mind. They believe—the wording of the clause justifies their belief—that by 2010 the Government will require e-filing of tax returns. That is not something that they want to see. 
 I would say to the Paymaster General that a certain insult has been added to injury, probably inadvertently, by the fact that on page 7 of the employers bulletin, published by the Inland Revenue on 11 May 2002—importantly, before the passage of the Bill—there is an item rather unoriginally and prosaically entitled, ''The future's bright, the future's e-payroll''. It goes on to say: 
''All employers will have to send their year-end returns and forms electronically from May 2010.''
 That is a direct breach of the promise that the Paymaster General made in her reply to her right hon. Friend the present Secretary of State for Trade and Industry in September 2000. 
 We do not believe that the Government have made a compelling case for the U-turn that they have performed. It is in the name of choice and a permissive approach, rather than instruction, prescription and compulsion, that I commend the amendment to the Committee. I save myself a little bit for other amendments to the clause to which we need to turn in due course.

John Burnett: I support the amendment wholeheartedly. I do not believe that it is in the interests of the Inland Revenue, let alone the taxpayers, that e-filing should be mandatory; it should be permissive. We all want to encourage electronic communication, but the Government are taking the power to make e-filing mandatory and that is simply not on. The clause will give the Government unbridled power that would substantially and adversely affect the lives of many
 people, especially the elderly who are not conversant with the internet, and who are invariably assiduous and law-abiding people.

John Bercow: Many people would be frightened by, and feel vulnerable because of, the arrangements of the clause. I am not suggesting that the person to whom I am about to refer is the most obviously vulnerable person or one easily frightened, but one person who would have grave difficulty if the clause were enacted would be my right hon. Friend the Member for Bromley and Chislehurst (Mr. Forth), who has gone on the record as saying that he would not recognise a website if it jumped out of his breakfast cereal.

John Burnett: The right hon. Member for Bromley and Chislehurst is not alone among Members of the House. There are many of us, and I confess that my knowledge of such matters leaves much to be desired, although I am considering taking courses.
 I return to the elderly and other individuals not conversant with e-mail and the internet. Those people will have to pay to go to intermediaries. They will be forced to do so and will incur expenditure that they can ill afford.

Iain Luke: Does the hon. Gentleman not accept that the elderly people doing tax returns that we are talking about will inevitably be going to agents anyway to ensure that their tax returns are properly processed?

John Burnett: No, absolutely not. I should like to place it on the record that, for years and years, I acted for a number of owner-managed businesses, and I found that many people, especially at the smaller end, did their own tax returns and filing. They did so for many reasons: first, because they were competent to do so; secondly, because they were honest; and, thirdly, because they could not afford to pay accountants to do it for them.

Peter Luff: There is, of course, the question of elderly people who employ domestic help. They will certainly not be using professional help.

John Burnett: Indeed, that is correct. I believe that that point was alluded to by the hon. Member for Buckingham (Mr. Bercow) when he referred to the major and compelling objections of a number of the professional bodies. Rarely have I seen unity on such a scale when discussing policy measures introduced by a Government. I do not want to repeat verbatim what the hon. Gentleman said, but the Institute of Directors has made it absolutely clear that it is not appropriate to compel people to file electronically. It thinks it deplorable that the regulations will, in effect, require taxpayers to use intermediaries and strongly believes that the words ''or require'' should be deleted.
 I refer to the submissions made on behalf of the Institute of Chartered Accountants. The hon. Gentleman has already referred to some of them. The ICA is a distinguished and authoritative body, and the Government should take heed of what it says. It questions whether the clause is compatible with the European convention on human rights, and says, quite clearly: 
''We feel strongly that the attempt to make an e-filing regime compulsory is the wrong approach. Whilst supporting the moves towards e-filing we believe the incentives should be by way of carrot, not stick.''

Dawn Primarolo: Will the hon. Gentleman share with the Committee why those institutions believe that moving to e-filing is a good thing?

John Burnett: For the very reasons that I, the hon. Member for Buckingham and others in the Committee have adumbrated. The Chartered Institute of Taxation states:
''We are concerned that these clauses impose a burden on all taxpayers not just those identified by the Carter Review and we believe that there should be let-outs for taxpayers who either cannot afford or choose not to use electronic communication.''

Mark Hendrick: Does the hon. Gentleman accept that, with the current roll-out rate of digital services, it is likely that, by 2010, people will be able to submit their tax returns through the equivalent of a television set?

John Burnett: I am afraid that I disagree with the hon. Gentleman. The year 2010 is slightly less than eight years from now, and there are people aged 50 in my constituency who want and prefer to use paper and do not wish to file their returns on the internet. They are also deeply concerned about confidentiality.

John Bercow: The hon. Gentleman is developing a powerful argument. I suggest to him that the position of the hon. Member for Preston (Mr. Hendrick) is flawed on both counts. He seems blissfully unaware that he is hoist with his own petard. Does the hon. Member for Torridge and West Devon (Mr. Burnett) agree that if the time scale is unrealistically tight, that is an argument against compulsion; if, as the hon. Member for Preston fondly imagines, it will be easily achievable, what is the need for compulsion?

John Burnett: Absolutely right. That is a good very point.
 I referred to confidentiality just before those interventions. People are not convinced about the security of such matters and that point of view should be respected. After all, we heard this morning on the news that people can tap in to the electronic communications of the Royal Family and senior Government Ministers, so what hope is there for individuals in small country towns and cities who submit their own tax returns, which often contain confidential details of their lives? It is not on and the Government should think again. The provision should be permissive, but mandatory e-mailing must be dropped. Permissive, yes; mandatory, definitely not.

Chris Grayling: I want to reinforce the comments made by my hon. Friend the Member for Buckingham and the hon. Member for Torridge and West Devon, and to raise another matter of concern that would result from this thoroughly ill-thought-out measure.
 This debate reflects the complete absence of understanding on the Government Benches of the reality of running a business. The range of businesses in this country is hugely diverse, with different cultures, different experience, different working environments and so on. To tell them that they must 
 do something with no choice defies all logic and suggests a complete absence of understanding. The Government seem to think that there is a large creature called ''business'' and that rules and regulations can be thrown at it and absorbed. The Government never seem to think through and consider the other end of their actions—the small business man or woman doing their books at home on a Sunday night and coping with the complexities, issues and changes that the Government require them to take on. 
 The Government, rightly and sensibly, want to encourage e-filing and none of us in the Committee disputes the logic for many business of being able to pursue such a route, but we part company with the Government's absolute insistence that there should be no choice. That is ill thought-out, narrow minded and does no favours for our hard-working business people. 
 We have heard about the issues that may arise. The hon. Member for Torridge and West Devon referred to people of the older generation and their unwillingness to change their way of working. Why should they? We expect the older generation to work longer in the future and we expect businesses to stay in business longer. People in traditional small craft firms—for example, those with masonry skills who carve elegant repairs on the sides of our cathedrals, those who thatch roofs, and others skilled in traditional crafts—will be asked to change the way that they work as they work into their older years and to buy the equipment to enable them to change the way that they work. That is illogical, unfair and unnecessary. 
 More particularly, another issue that has not yet been referred to is corporate security. Many companies have taken the decision to have a firm wall around their internal networks to the point where there are no links between those networks and the outside world for security reasons because, whether we like it or not, it is possible to hack into virtually any network anywhere in the world. Some people make a living from hacking their way into networks, finding confidential financial information and using it against those businesses or to cause trouble for them. 
 I am aware of companies that have taken a specific decision no longer to provide electronic links from their networks to the outside world. They may have a couple of machines in the office from which staff are able to send e-mails, but they do not provide external links. Are the Government telling those companies that they must put in place external links that feed straight through to their financial systems, to enable them to lodge an e-file of their PAYE details, even if they have strategic reasons for being unwilling to provide such links, such as consciousness of the security implications—potentially, national security implications? Will companies no longer have the ability to cut themselves off from the internet if they believe that the risk is not worth while? Will the Government compel such organisations to open their networks to outside links? It would be extremely foolish to do so, for the reasons that we have heard today.

Mark Hendrick: Has the hon. Gentleman heard of encryption?

Chris Grayling: The hon. Member for Preston demonstrates his naivety in that intervention. If one considers the evolution of technology, it is absolutely clear that there are no guarantees on the internet. There are no guarantees with encryption, because it is breakable. People make a living breaking encryption technology. I know of companies that have specifically said that it is not worth the risk.

Mark Hendrick: I speak as a computer scientist and someone who has studied the subject at length. Some codes can be broken, but others would require such tremendous computing power that no machine on earth would be able to break them.

Chris Grayling: I simply do not accept the hon. Gentleman's assurances that no machine on earth is able to do something, given the technological changes in the past 20 years and the fact that we are looking eight years into the future when technology may have changed enormously. Furthermore, the concept that a small business will use high-quality encryption technology to protect itself when e-filing is equally improbable.

Tom Harris: Notwithstanding my reservations about some aspects of the Bill, which we will discuss in the next set of amendments, does not the hon. Gentleman accept the Government's reassurances that an intermediary would resolve all the security issues for any firm that has such misgivings? I totally accept that some firms do not want to hook up to outside agencies and may see that as a breach of security but, surely, that is the purpose of an intermediary. There would be no lapse of security for any firm that wanted to employ an outside accountant, for example.

Chris Grayling: No, I do not accept that, because companies would be required to work in a different way. They would be required to create links that they may for very good strategic reasons not want to create, whether through an intermediary or not. Companies would not necessarily want to use an external agency to handle their payroll if they have an internal department capable of doing that.
 All the points that hon. Members made may have some foundation in truth, but I cannot accept the compulsion element as right or necessary. The Government can encourage and incentivise, but they should not require, and I hope that they will change their mind even at this stage.

John Pugh: In supporting the amendment, I accept that the Carter report recommended precisely this measure and a mixture of incentives and compulsions. As I understand the legislation, the Government have taken power to compel and coupled that with a few pathetic incentives, such as £250 for a small business, which will not buy much of a computer these days.
 There are objections to the measure. I understand some of them, but others I understand rather imperfectly. There appears to be root-and-branch religious objection—there have been moments in my life when I thought that the computer was the 
 instrument of the devil—but the objections have not been properly explained. On moral objections that have been put forward, some people have suggested that staff should not be given access to the internet or that firms may wish to work in an environment that does not include internet access. In most businesses, that is not really a difficulty, because there are always ways of getting around or getting control of IT apparatus, but there is a problem for the individual who has just one employer. 
 The fundamental issue appears to be that we allow a multiplicity of payment methods—one can pay by cash, cheque or credit transfer—but for some reason the Government seem to be ruling out multiplicity of ways of form filling. One has to ask oneself who that is good for. Is it good for business or the Exchequer? I think that the Government believe it is good for both. They have a puritanical belief that the more business gets into computers, the more efficient it will be. They see a necessary connection between IT and efficiency. That connection sometimes exists, but as anyone who uses IT will find, it is not always there. 
 What the Government are demanding goes a little further than demanding that people fill in a form with a black pen. It has consequences for data recording, equipment procurement and security. There are any number of agencies that, according to the Government's own legislation, will have access to anything sent via an internet service provider. The Government are being permissive—from a Home Office angle—in opening up access to records on the part of Government bodies. I think that when people send in their tax records they have a right to know that those records have gone to the tax body, which is where they are retained and not snooped on by anyone else. Hackers are also a problem, which has already been alluded to. 
 I want to make a further, slightly geeky, technical point, which has not been addressed. The legislation appears to allow the Secretary of State to specify the format by which people may communicate. So it is not simply that one has to communicate via the internet, but one has to do so in a format that is acceptable to the Department. That gives the Government unfettered power to specify a format. They can require or favour particular software, browsers or platforms, whether that is PC, Unix or Mac. I do not want to enter the debate about Microsoft and anti-trust legislation, but we already know that the Government attitude to IT has made it impossible for people to access Government services who do not use proprietary software, which happens in most cases to be Windows-based software. There should be some kind of guarantee in the legislation that no matter what format of IT a firm is using, it should have access to the Inland Revenue, and should not have to buy the necessary software or platform.

John Bercow: In reflecting on the clause, what assessment has the hon. Gentleman made of line 25, subsection (3), in which the Government elliptically inform us that they propose
''provision for the application of conclusive or other presumptions''?

John Pugh: The hon. Gentleman has picked up on my anxiety. We know that the Government are keen to collude with the IT lobby. We do not want the Government colluding with Bill Gates and the Microsoft lobby in every case. That not only flies in the face of what I call decent commercial principles, but flies in the face of the Government's principles, which they adopted in the Enterprise Bill. That Bill is strongly anti-monopolistic and in favour of there not being one IT culture across the board. The House of Commons has sold out entirely to Windows and Internet Explorer. I would like an assurance from the Paymaster General that whatever the Inland Revenue develops, and whatever road it goes down, at the end of the day, regardless of the IT equipment that is used—

Dawn Primarolo: May I inform the hon. Gentleman that the Inland Revenue already offers an online service for PAYE, which is all that we are talking about today? The provisions in the Bill will ensure that when the intermediary uses another software package it is compatible and capable of being used in the interaction with the Inland Revenue. That follows exactly the point that he has been making for the last few minutes and has been the case for some time.

John Pugh: I am not responding to what the practice of the Inland Revenue currently is; I am responding to what the legislation says. The Inland Revenue has the right to specify. It may behave itself in a totally appropriate way now, but it might not in future, which is precisely the point.

Michael Jack: Having had something to do with the establishment of electronic communication between the Revenue, the citizen and business, I have some sympathy with the Government of the day wanting to employ systems that have now established themselves, as the Paymaster General's intervention on the hon. Member for Southport suggested. One could fill up the entire time for the rest of today asking important and searching questions about the security, operation, software and computer issues related to the electronic transmission of data, all of which would be entirely proper. My view, however, is that there is an established protocol there and that the systems work as well as any other bulk transmission system for data.
 The Paymaster General has already said that much of the system is already in place and that many big businesses are already benefiting tremendously from the electronic transmission of tax return data under the current regime. No doubt many accountants are doing that on behalf of big businesses and many small and medium-sized enterprises are beginning to experience the joys of electronic returns. However, what saddens and worries me is that the Government have not chosen the route of further persuasion but are being absolutist in the way in which they are going about the matter. 
 The explanatory notes on the clause reassure us that this is a matter for the employer. However, the clause itself does not say that. It talks about the delivery of information for ''specified persons''. By definition, specified persons are not specified. The part of the clause that my hon. Friend the Member for 
 Buckingham seeks to amend gives powers to the Commissioners of Inland Revenue to make regulations. For clarification, can the Paymaster General tell us whether that means that the commissioners—I have forgotten how precisely they make their regulations—can make the regulations without their being returned to this House, or can make them with the benefit of the law as specified in this clause?

Dawn Primarolo: I can answer that question now. The right hon. Gentleman might remember, from when he was Financial Secretary, that all PAYE regulations are dealt with under the negative procedure in that way. It worked like that under the previous Government. The reason is that discussions with the payroll providers about best methods and the need for constant improvement mean that the service can often be improved. Sometimes that requires some changes to regulations. That is precisely what has happened in the past and there will be no change in future when the matter is under the commissioners.

Michael Jack: I am genuinely grateful to the Paymaster General for refreshing my memory, but that gives me cause for concern. If the regulations are made under the negative procedure, the chances of this House revisiting the territory are very limited. That is why imposing the measures by compulsion, as opposed to agreement and discussion, is very worrying. In another capacity, serving on the Environment, Food and Rural Affairs Committee, I have been involved in a study of the way in which the European Union decided to introduce a regulation dealing with the disposal of fridges. The lack of consideration, ahead of the agreement's coming into force, of how that should be done was remarkable and has left us with the practical implications of fridge mountains.
 I am not saying for a moment that these systems are not in place and that we will not have some robust method of transmitting information to the Revenue. But according to the Government's explanatory notes, there is clearly a lot of work to be done 
''to persuade many small employers to remove away from paper.''
 Paradoxically, the notes go on to say: 
''The report recommended a mixture of compulsion and incentives'',
 but the Government seem to be backing compulsion over incentive. I think that they are being premature in producing the proposal now, when there is obviously much more work that could be done by negotiation, education and discussion. 
 The benefits are clearly there and companies should be able to work out for themselves that if, as in the majority of cases, they keep information electronically, being able to summate that in the form of a return and send it would be to their advantage. As other hon. Members have said, it will not always be the case that particularly an embryonic business, perhaps in the first six months of its existence as it copes with all the complexities of establishing a business, even by the year 2010, will be fully capable of working out what it has to do with year one's tax returns on behalf of its employees. For example, it might have set up a paper system. It might be a collection of individuals who 
 formed themselves into a company. Even in the year 2010, they might not have got around to doing it, yet the clause offers absolutely no flexibility in such a situation. 
 I agree with the hon. Member for Preston that by 2010 a new cohort of entirely computer-literate people will be involved in business in the United Kingdom. They may well be able to cope but, even then, there may be people who retire at the age of 60 and look for a second employment without some of those skills. The inflexibility of the compulsion worries me. 
 Another aspect that worries me is the wording ''specified persons'' in the clause that my hon. Friend the Member for Buckingham seeks to amend. We do not know to what extent specified persons will go beyond the indication in the explanatory notes that they will be restricted to those in the world of commerce. Specified persons could be anyone with an obligation to submit information to the Inland Revenue. It is dangerous to agree now, without let or hindrance, to a clause that empowers the commissioners to make regulations in which they can list, if they so wish, anyone that they want.

John Bercow: My right hon. Friend has rightly picked up on a point to which I did not refer; namely, the reference to specified persons. If one considers the clause, there is further reason for anxiety that there will be different categories of specified person. Specified persons will not necessarily all be equal to one another. In subsection (7)(c), the Government arrogate to themselves the power
''to make different provision for different cases''.
 There are different types of specified person. What is their nature, and how will they be treated differently? We are none the wiser.

Michael Jack: I could, but I will not at this stage go through much more of the Bill, partly because I suspect that I might be wandering out of order.

Peter Luff: I would encourage my right hon. Friend to do that, because subsection (8) goes to the nub of our concerns about the clause:
''the imposition on any person''—
 that is who the specified person is— 
''of any requirement or the issue to any person of any request''.
 There are extraordinarily sweeping powers in the clause.

Michael Jack: I am grateful to my hon. Friends for embroidering and adding to my point. In the spirit of modernising our tax system and using the benefits of the systems run by Electronic Data Systems on behalf of the Inland Revenue, I would have liked the Government, first, to produce a document showing how the development could be introduced over time, together with a draft of the regulations so that people would have had an opportunity to consider what they were being asked to approve; and secondly, to consult on it and deal with all the proper points of security, technical compatibility and all of the electronic items,
 all of which could have been discussed. I do not think that the report to which others have referred went into the detail that is now being invoked by clause 132. I have many concerns; for example, it is difficult to see where dispute resolution comes into the process.
 Let me conclude by saying why I am concerned that the Government may be rushing their fences. All members of the Committee receive payments from the House of Commons Fees Office from time to time. I received a piece of paper advising that such a payment had been sent to me electronically. I searched for it on my bank account, but it did not appear. I rang my bank, which told me that there must have been an error that I should check. To cut a long story short, a check was run from the Fees Office via the Bank of England, which showed conclusively that the electronic data had arrived at my bank, but my bank continued to deny that the transaction had ever taken place. I was left in the middle in an electronic no-man's-land. I could not personally, as a citizen, prove absolutely that the transaction had taken place. I could tell my bank that the paying authority had the authority of the Bank of England that the transaction had taken place, but the bank still denied it. Eventually, it accepted the force of the argument, but that is one example of what can go wrong in the world of electronic transmission. I shall not labour the point, but it illustrates that if the Government compel citizens and businesses to go down that route, they must be able to demonstrate, before pressing the e-button, that they have their act together and can answer all the questions that people are rightly posing. 
 There is no compulsion in this country to vote, yet we are being invited to make an important transaction between the world of business and the Revenue an irrevocable process with the weight of law but without publication of the details of the regulations and without consultation on all the questions that have been asked. On this occasion, supportive as I am of the use of electronics in the Revenue, I believe that this is a misjudgment by the Government.

Rob Marris: That was an interesting intervention from the right hon. Member for Fylde (Mr. Jack). Like him, I support the Government's encouragement for businesses and individuals to be up to date with the e-revolution. However, I have reservations about the compulsory aspect at this stage. I seek reassurance and an explanation of ''specified persons'' and ''specified information'' in subsection (1), although ''specified information'' is adumbrated later in the clause.
 The Paymaster General said that we are discussing PAYE, but I do not see that in the Bill and I should like reassurance on that, as well as on the software, to which the right hon. Member for Fylde referred. I am a member of the Select Committee on Work and Pensions, which is all too aware that the software for the Child Support Agency let the Government down on 20 March when the change in the Child Support Agency had to be pulled. That is not the only software difficulty experienced by the Government and, indeed, the private sector has also had huge difficulties with software and computer systems. 
 The explanatory notes refer to 2010, but that date is not in the Bill. I should like some reassurance from the Paymaster General. I support the project in terms of encouragement, but there are some i's to be dotted and some t's to be crossed.

Howard Flight: I shall be brief. The various reasons why people may not want to use electronic communication have been set out and I want to stress the point made by my right hon. Friend the Member for Fylde about evidence, which is crucial to businesses' and individuals' dealings with the Revenue.
 It is blindingly obvious to me that many businesses and individuals will use electronic communication in future or are already using it. If they want to do so, that is fine, but the Soviet habit of compulsion that is creeping into the Government is absolutely unacceptable. Death and paying taxes are perhaps the two most important and greatest certainties of life. The Paymaster General may respond by saying that the clause does not matter because the negative resolution procedure is available, but everyone knows that that is bogus. The reality is that the clause would give the Revenue the power to insist with fines of £3,000 for anyone who does not do whatever it insists on. I am sorry, but that is completely unacceptable in a free society.

Mark Hendrick: The hon. Gentleman talks about a free society. He will remember, as I do, the days when people were paid in cash. It became the norm that people had bank accounts and were paid electronically, as the right hon. Member for Fylde referred to earlier. That was not seen as some big infringement of civil liberties. In the same way that electronic systems occasionally go wrong, pay packets occasionally went missing. Why is the provision such a big infringement?

Howard Flight: With the greatest respect, the hon. Gentleman seems to have a complete mental block as to what the essence of liberty is. Many people still are paid in cash. If people want to be paid in cash, they can be. That is an arrangement between them and their employers. It has nothing to do with their dealings with the state. The payment of tax is a particularly important issue. It touches on people's private affairs, and is potentially vulnerable to leaks and so on. The Paymaster General's letter to the right hon. Member for Leicester, West was entirely right and I shall repeat it:
''I confirm that is not Government policy to force people to use the internet . . . we are committed to offering them the choice of electronic services.''
 That is what we are about as a society. The clause is outrageous, and the Committee should throw it out.

Mark Hoban: I support the amendment, which would make the requirements to file electronically permissive rather than mandatory. The Paymaster General muttered from a sedentary position earlier that about 94 per cent. of businesses have access to the internet. It is very important that they have access, but businesses use the internet for different purposes, and they are conscious of the risks attached to using the internet for transactions. My
 right hon. Friend the Member for Fylde mentioned the issues concerning the electronic transmission of data, and the failure of that in the transaction to which he referred. Other businesses may have concerns about the security of the information that they have transmitted. Hon. Members will be aware of the problems that the Inland Revenue had with its software for the online filing of self-assessment, when it became apparent that people filing returns had inadvertent access to the data of other taxpayers. If we are not sure that the systems will be secure, people will not want to use the internet to transmit end-of-year returns. The security of data once they have been transmitted is a legitimate concern and a good reason why the amendment moved by my hon. Friend the Member for Buckingham should be accepted. The provision should be made permissive rather than mandatory.

Dawn Primarolo: First, it is important to put the debate, and the purpose of the Carter review, in context. The previous Government commissioned work and tried to pay particular attention to the compliance cost to business in running the PAYE system. The clause refers only to the PAYE system. That is for employers with employees who are returning their tax and national insurance information. The previous Government tried very hard in the circumstances, without huge success, which reflects the technological developments of which the Government are now able to take advantage. The previous Government tried to reduce compliance costs, particularly for small and medium-sized businesses, but were unable to do so.
 The current Government have continued to look specifically at how compliance costs for smaller businesses could be reduced and businesses, in particular smaller ones, could be empowered and provided with methods of developing their business potential through the use of new technologies that we are developing. The Carter review was commissioned as an independent review to discuss with all the representative bodies that have been referred to today, and the small business representatives, how progress could be made on achieving the dual objectives that everyone wanted: how to try to reduce compliance costs and how to encourage and provide for the greater use of e-technology. 
 The Carter review, having consulted widely, reported to the Government and that report was published. We then asked for further comments. The Government propose a package of incentives spread over five years to encourage small employers to switch to electronic filing and realise the benefits of IT support for the payroll. The Government are committing, over those five years, £420 million of incentives to be paid to intermediaries. We already provide, through the Inland Revenue sites, the opportunity for direct returns through PAYE, which have caused none of the problems to which hon. Gentlemen have referred—Armageddon has not occurred for those businesses. However, many businesses, especially small ones, have told the 
 Government that they want to work through intermediaries. 
 The response to the review was to pay all the money in incentives, but not have the final benefit of electronic communication until 2010. Carter recommended 2007, but the Government decided that we need a little longer and chose 2010. The reason is so that clean data are provided. One problem for small businesses and their representative bodies, mentioned in many representations made during the debates on this Finance Bill, is that there are many reasons why correct information is not provided—paper floating around, returns sent to the wrong place, returns not sent in on time—which can lead to incorrect data being stored by the Inland Revenue. What happens then is that inquiries can occur that need not have been made, causing more compliance costs and pressure on a business; or service to the business can be delayed while there are endless investigations to piece all the data together, or a completely wrong assessment may be made. Small businesses were widely consulted, on this matter specifically—hon. Members can see from the Carter report, which is in the Library, exactly what they said and that it was not only the Government contributing to the review—and concluded that they wanted effective, quick and accurate service from the Inland Revenue on their PAYE. They wanted to ensure that they could attempt to reduce their compliance costs and they welcomed the opportunity to develop their business through e-commerce.

John Pugh: Is it recorded that those small businesses also wanted mandatory e-mail filing?

Dawn Primarolo: What they want is clean data. The way to ensure that is to have the data transmitted to the Inland Revenue on time in forms that are acceptable. I would say to the hon. Gentleman that—[Interruption.] That is to ensure that the correct information is collected. It is a burden to ask for information that we do not require—we often receive such information—and businesses want to be able to develop.
 Turning to the figures for businesses, the annual Department of Trade and Industry benchmarking study shows that the number of United Kingdom businesses connected to the internet rose from 90 to 94 per cent. during 2001. That is the highest connection rate in any G7 country. The 2001 benchmarking survey also shows that there has been a rapid increase, from 15 per cent. in 1999 to 62 per cent in 2001, in microbusinesses making use of the internet. 
Mr. Bercow rose—

Dawn Primarolo: I shall give way in a moment, if the hon. Gentleman will allow me to finish my point.
 The Government's objectives are to listen to businesses, to provide incentives to use an intermediary—an accountant—who files on the internet, to try to reduce the compliance costs for businesses and to make the change in a way that enables them to develop the technology so that they 
 can grow. Those principles underpinned the review and that is what we are delivering in these provisions.

John Bercow: I am sure that I am not alone in being underwhelmed by the Paymaster General's statistical litany. I want to ask her a question that I asked of another hon. Member earlier. If use of the net and e-filing are as popular as she supposes, why does e-filing have to be compulsory?

Dawn Primarolo: The Carter review demonstrated that it was necessary to provide an incentive for smaller employers to move to that position. The Government will invest £420 million to do that. If we are to invest the money and tell businesses that we will deliver the service with clean data, we must ensure that we reach that point, hence the requirement for PAYE for small businesses to be made by electronic filing by 2010.
 I fully understand that there are exceptions, particularly in a small section of the community with deeply held views about internet use. I shall return to those specific points once I have made the general case and answered the questions about why e-filing will be compulsory for PAYE and for small and medium businesses.

Howard Flight: The Paymaster General has made much of the £420 million investment. She said that the Government want tit for tat and that, if they put money in, they want everyone to be forced into e-filing. What does she mean by investment? I presume that she is saying that programmes will be put in place with a view to saving costs in the running of the Inland Revenue. That is not Government investment; it is merely part of the mechanics of collecting tax effectively.

Joe Benton: Order. Before the hon. Lady responds, I want to clarify something in the light of her comment before the hon. Member for Arundel and South Downs intervened. I am curious about whether she will encroach on amendment No. 230.

Dawn Primarolo: Okay. I shall not do that. I apologise, Mr. Benton, but I know that some hon. Members, regardless of the amendments, are concerned about compulsion for everyone and want to know whether there will be exemptions. I shall respond to that point not under these amendments but under amendment No. 230. I wanted to notify the Committee of that, because the point has been behind many of the comments that have been made, particularly with reference to the Human Rights Act 1998 and whether the compulsion would be a breach of others' deeply held views, for which the 1998 Act provides.
 In response to the hon. Member for Arundel and South Downs, the Government propose that payments start at £250 for 2004–05. We do not need to include that in the Bill, because we already have the power to pay the incentives. The payment is not for equipment but for the intermediary's bill. It is intended to facilitate the use of the intermediary by way of a direct subsidy to those who use it, so it reduces their costs, because they still have to do tax returns and pay an accountant if they use one. The payment tapers off 
 during the five years to a final payment of £75 in 2008–09. 
 The software is not specified by the Inland Revenue. There are many different types of software and methods. There is constant change and communication with the Revenue, and that will grow. Therefore, we are not specifying which software must be used. It will be developed by the industry. I should have thought that the Opposition would encourage the Government to do that, rather than try to create their own. Therefore, it is a direct payment to the intermediary for the services provided, which we would expect to be passed on to the individual business. Small businesses said that that was what they wanted. Having consulted and listened to them, that is what we have provided.

John Pugh: This is a significant point. The Paymaster General has just said that businesses can choose whatever software they want, yet subsection (2) states:
''Regulations under this section may make provision—
(a) as to the electronic form to be taken by information delivered to the Inland Revenue using electronic communications''.
 It appears that a power has been reserved to the Inland Revenue. If I have misunderstood, I would be happy to have clarification from the Paymaster General.

Dawn Primarolo: The hon. Gentleman has misunderstood the clause. On a day-to-day basis, the Inland Revenue discusses software development with software designers to ensure that the legal
 requirements of the tax system are met. The regulations and the Bill provide for the continuation of such discussions, which take place at present. The measure is not intended to be used in the way that the hon. Gentleman suggests. He probably knows well that software developments and the knowledge and expertise of the IT industry are expanding all the time. It is necessary to ensure that the software can be used to provide the information that the PAYE legislation obliges the employer to give when he makes the return. That is the purpose of the measure.
 The Opposition are looking for ghosts, skeletons and reasons why the Government are taking this approach. If they examined the current practices of the tax system with regard to paper transactions, they would see that the measure translates those practices into electronic delivery of the same information. Basically, that is what is provided for and what is happening. 
 Amendment No. 231 would require that regulations made under the clause could not provide for a penalty to be charged if an employer did not comply with a requirement to send his return electronically. The regulations made under the powers will require employers to send certain returns electronically— 
 It being One o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order. 
 Adjourned till this day at half-past Four o'clock.